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ASIAN PAINTS
High base, prolonged monsoon impact growth
Results below estimate; largely due to one-off event
Asian Paints’ consolidated net revenue of INR 18.1 bn is below our estimate of
INR 20.8 bn. PAT is at INR 2.1 bn against our estimate of INR 2.4 bn. Prolonged
monsoon experienced in most parts of India, delayed onset of festive season
(Diwali) and high base hit paint demand in Q2FY11. Revenues in the domestic
market rose 6% Y-o-Y, to INR 14.69 bn, below estimate. Economic recovery in
some of the overseas market remains sluggish, barring South Asia and Egypt,
hitting consolidated numbers.
EBITDA flat; margins decline marginally
The company posted EBIDTA of INR 3.3 bn in Q2FY11 vis-à-vis INR 3.2 bn in
Q2FY10. EBIDTA margins declined marginally by 47bps, led by 40bps and 54bps
expansion in employee and other costs, respectively. This was, however, offset
by 52bps dip in COGS. Input prices have increased considerably and could strain
margins in the coming quarters. The company has already hiked prices by
4.15% on May 01, 2.6% on July 01 and 1.2% on August 01, 2010. Increase in
other expenses can be attributed to increase in ad spends as both Nerolac and
Nippon Paints are advertising heavily (we had pointed this out earlier).
Gross margin expansion backed by price hike, change in sales mix
As per the company, price hike did not really impact volumes since it was more
or less in line with competition. Despite raw material price index ballooning from
106.48 in Q1FY11 to 112.38 in Q2FY11, the company was able to maintain gross
margin due to sufficient price hike and change in sales mix.
Asian Paints delivered a disappointing set of numbers for Q2FY11. We expect ad
spends to rise, going forward, on account of higher competitive intensity and ad
rate inflation. Also, input prices are estimated to harden further, which the
company is unlikely to be able to mitigate since it avoids hiking prices in the
Diwali quarter (last year, it had however hiked prices before Diwali). This could
adversely impact margins. However, the company has a dominant market share,
is a leveraged play to GDP and domestic consumption, and largely caters to
retail consumers, which are significant advantages. Moreover, in the ongoing
buoyant economic scenario, normal weather condition and festive season,
demand is expected to recover in the coming quarter. We maintain ‘BUY’ on the
stock and rate it ‘Sector Outperformer’ on relative return basis.
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